Platform for active non-transparent exchange-traded funds

ABSTRACT

The techniques disclosed herein permit active, non-transparent management of financial assets within an exchange-traded fund while yielding the traditional advantages of scale and cost efficiency for secondary market participants. The fund may supplement traditional periodic disclosures of holdings with additional information to facilitate accurate intraday pricing of ETF shares. In this context, a substitute basket may be engineered and published on a daily basis that closely tracks the fund composition, but contains an active share of about 5-30% relative to the fund in order to obfuscate the actual fund holdings. This substitute basket may advantageously provide a high quality signal of fund value, while also facilitating in-kind transactions in the primary market that are closely related to the fund composition without revealing specific fund holdings or weightings.

CROSS-REFERENCE TO RELATED APPLICATIONS

This application claims priority to U.S. Provisional Patent ApplicationNo. 62/904,254 filed on Sep. 23, 2019, U.S. Provisional PatentApplication No. 62/983,163 filed on Feb. 28, 2020, and U.S. ProvisionalPatent Application No. 63/040,223 filed on Jun. 17, 2020. The contentsof each of the foregoing is hereby incorporated by reference in itsentirety.

TECHNICAL FIELD

This disclosure relates to exchange-traded funds, and more particularlyto creating, redeeming, and trading in an active, non-transparentexchange-traded fund.

BACKGROUND

Exchange-traded funds (ETFs) provide individual investors withcost-effective access to large baskets of securities. In an ETF, a fundthat owns a portfolio of financial instruments issues shares in theportfolio for trading in a secondary market such as a stock exchangewhere individual investors can buy and sell the shares in trades of anysuitable size. Investment companies that operate ETFs do not sell theseshares directly to the general public. Instead, ETFs distribute andredeem shares through authorized participants (APs), typically in“creation units” of 10,000-50,000 shares or multiples thereof. The APs,in turn, serve as a bridge to secondary markets used by other traders.Shares in an ETF generally trade in the secondary markets at a pricebased on the net asset value (NAV) of the underlying portfolio held bythe ETF.

Early ETFs were passive vehicles that tracked published indices such asthe S&P 500. These so-called index funds enable investors to obtainexposure to the securities of an entire market or index with a singletradeable product, and they still constitute the majority of ETFs thatare traded today. In recent years, however, actively managed ETFs haveemerged as an alternative to passive funds. In an actively managed ETF,a portfolio manager can make discretionary trades in an effort toincrease returns. Historically, these active ETFs have been required todisclose their holdings on a daily basis so that investors can properlyvalue the underlying ETF shares, and so that APs can conduct creation orredemption transactions with the ETF via in-kind exchanges in which ETFshares are exchanged for a basket of the underlying financial assetsheld by the ETF.

While these disclosure requirements appear to work adequately, they canalso impose limits on an active manager's ability to trade effectivelyfor the benefit of the ETF. For example, the daily disclosure of anactive ETF's holdings can reveal the investment strategy of the managerof the active ETF, thereby allowing duplication of a fund strategy byothers. This also creates the possibility of front-running the fund'sindividual trades, where third parties seek to benefit by anticipating afund manager's future trades. There remains a need for an improved ETFstructure that permits a portfolio manager to make discretionary tradeswithout disclosure, while still providing sufficient pricing informationfor market makers and other traders to accurately estimate the value ofETF shares.

SUMMARY

The techniques disclosed herein permit active, non-transparentmanagement of financial assets within an exchange-traded fund whileyielding the traditional advantages of scale and cost efficiency forsecondary market participants. The fund may supplement traditionalperiodic disclosures of holdings with additional information tofacilitate accurate intraday pricing of ETF shares. In this context, asubstitute basket may be engineered and published on a daily basis thatclosely tracks the fund composition, but contains an active share ofabout 5-30% relative to the fund in order to obfuscate the actual fundholdings. This substitute basket may advantageously provide a highquality signal of fund value, while also facilitating in-kindtransactions in the primary market that are closely related to the fundcomposition without revealing specific fund holdings or weightings.

In one aspect, Authorized Participants (“APs”) can transact directly inthe substitute basket, which facilitates efficient arbitrage and hedgingwith resultant narrower bid/ask spreads that can encourage participationin the primary and secondary markets for the fund's shares. At the sametime, pricing information such as a periodic indicative net asset value,intraday net asset value, and daily disclosure of metrics such ascomposition of the substitute basket, active share, tracking error,asset allocation, and the like may be published. This provides usefulinformation for secondary market trading, while also offering sufficientprice information to encourage the creation and redemption of ETF sharesby APs in response to excess supply or demand. In another aspect, anaffiliated broker-dealer may be positioned between the fund and APs forcertain transactions so that an AP is not exposed to the fundcomposition when using the substitute basket to create or redeem ETFshares.

The substitute basket can be configured to closely track the creationbasket used by the fund to create or redeem. For example, the substitutebasket may have an overlap (e.g., 80%, 85%, 90%, 95%, or some othervalue) with the securities held by the fund, or stated differently, mayhave an active share of about 5-30% relative to the benchmark fund. Theactive share may include overweighting or underweighting of securities,or the inclusion or exclusion of certain securities in a manner thatvaries holdings relative to the fund. By disclosing only the substitutebasket, the systems, devices, and methods described herein candiscourage front-running of fund trades. For example, the substitutebasket may also exclude, underweight, or overweight securities in theETF that are about to be traded in the near future, thereby reducing therisk of free-riding or front-running with respect to those specifictrades.

Additionally, systems, devices, and methods disclosed herein may reduceprice discrepancies between ETF net asset value (NAV) and the secondarymarket price of ETF shares by allowing more price-related information tobe published more frequently. In some implementations, an actual orestimated value of the fund holdings, or some other indicative net assetvalue, may be published frequently (e.g., every 1 second, 2 seconds, 5seconds, 10 seconds, 15 seconds, 1 minute, 2 minutes, 5 minutes, 10minutes, 15 minutes, etc.) to allow frequent estimations of the value ofthe ETF. Other metrics related to the substitute basket may be publishedalong with the substitute basket composition, such as the active shareof the substitute basket relative to the fund holdings that formed thebasis for the last NAV calculation, a daily deviation between theperformance of the substitute basket and the ETF, or any otherquantitative measure or combination of measures. These substitute basketmetrics can facilitate independent calculations or estimates of realtime value by market participants for purposes of trading, hedging, andarbitrage.

BRIEF DESCRIPTION OF THE DRAWINGS

The foregoing and other objects, features and advantages of the devices,systems, and methods described herein will be apparent from thefollowing description of particular embodiments thereof, as illustratedin the accompanying drawings. The drawings are not necessarily to scale,emphasis instead being placed upon illustrating the principles of thedevices, systems, and methods described herein. In the drawings, likereference numerals generally identify corresponding elements.

FIG. 1 is a block diagram of a computerized system for transacting inexchange-traded funds.

FIG. 2 is a diagram of a computing device for use in the methods andsystems described herein.

FIG. 3A illustrates a method for creation of a substitute basket.

FIG. 3B illustrates a user interface for creation of a substitutebasket.

FIG. 4 illustrates a system for publishing valuation information.

FIG. 5 illustrates a method for creating exchange-traded fund sharesusing a substitute basket.

FIG. 6 illustrates a method for redeeming exchange-traded fund sharesusing a substitute basket.

FIG. 7 illustrates a method for creating exchange-traded fund sharesusing cash.

FIG. 8 illustrates a method for redeeming exchange-traded fund sharesusing cash.

FIG. 9 illustrates a method for creating exchange-traded fund sharesusing a custom basket of securities.

FIG. 10 illustrates a method for redeeming exchange-traded fund sharesusing a custom basket of securities.

FIG. 11 is a block diagram of a computerized system including anintermediary for transacting in exchange-traded funds.

FIG. 12 shows a system for managing a fund with multiple share classes.

DESCRIPTION

Embodiments will now be described with reference to the accompanyingfigures. The foregoing may, however, be embodied in many different formsand should not be construed as limited to the illustrated embodimentsset forth herein.

All documents mentioned herein are hereby incorporated by reference intheir entirety. References to items in the singular should be understoodto include items in the plural, and vice versa, unless explicitly statedotherwise or clear from the text. Grammatical conjunctions are intendedto express any and all disjunctive and conjunctive combinations ofconjoined clauses, sentences, words, and the like, unless otherwisestated or clear from the context. Thus, the term “or” should generallybe understood to mean “and/or” and so forth.

Recitation of ranges of values herein are not intended to be limiting,referring instead individually to any and all values falling within therange, unless otherwise indicated herein, and each separate value withinsuch a range is incorporated into the specification as if it wereindividually recited herein. The words “about,” “approximately” or thelike, when accompanying a numerical value, are to be construed asindicating a deviation as would be appreciated by one of ordinary skillin the art to operate satisfactorily for an intended purpose. Similarly,words of approximation such as “approximately” or “substantially” whenused in reference to physical characteristics, should be understood tocontemplate a range of deviations that would be appreciated by one ofordinary skill in the art to operate satisfactorily for a correspondinguse, function, purpose, or the like. Ranges of values and/or numericvalues are provided herein as examples only, and do not constitute alimitation on the scope of the described embodiments. Where ranges ofvalues are provided, they are also intended to include each value withinthe range as if set forth individually, unless expressly stated to thecontrary. The use of any and all examples, or exemplary language(“e.g.,” “such as,” or the like) provided herein, is intended merely tobetter describe the embodiments and does not pose a limitation on thescope of the embodiments. No language in the specification should beconstrued as indicating any unclaimed element as essential to thepractice of the embodiments.

In the following description, it is understood that terms such as“first,” “second,” “top,” “bottom,” “up,” “down,” and the like, arewords of convenience and are not to be construed as limiting termsunless specifically stated to the contrary.

To provide an overall understanding of the disclosure, certainillustrative implementations will now be described, including systems,methods, and devices for creating, redeeming, and publishing priceinformation for shares of exchange-traded funds, as well as the creationand use of substitute baskets in any of the foregoing. However, it willbe understood by one of ordinary skill in the art that the systems andmethods described herein may be adapted and modified as is appropriatefor the application being addressed and that the systems and methodsdescribed herein may be employed in other suitable applications, andthat such other additions and modifications will not depart from thescope thereof. Generally, the computerized systems described herein maycomprise one or more engines, platforms, modules, compute instances, orthe like, which may include a processing device or devices, such as acomputer, microprocessor, logic device, or other device or processorthat is configured with hardware, firmware, and/or software to carry outone or more of the computerized methods described herein.

FIG. 1 is a block diagram of a computerized system for transacting inexchange-traded funds. In general, the system 100 may include a fundplatform 102, an affiliated broker-dealer platform (“ABD platform”) 104,and an authorized participant platform (“AP platform”) 106 coupled in acommunicating relationship to form a primary market 108 for ETF shares.In general, the AP platform 106 may interact with secondary markets 110through a market maker 112 or other liquidity provider or the like, andtraders 114 may transact among one another (and with the market maker112) in ETF shares and other securities in the secondary markets 110.

The fund platform 102 may be a computing device or computer systemoperated by an investment company that sponsors an exchange-traded fund.The fund may be formed of any suitable financial instruments including,without limitation, assets such as U.S. securities, foreign securities,other exchange-traded funds or mutual funds, corporate or governmentbonds, depositary receipts, unit trusts, and/or any other financialassets or instruments suitable for inclusion in an exchange-traded fund.The fund platform 102 may store data such as an asset ledger and otherdata associated with tracking the fund's composition and supporting funddisclosures such as those described herein. The fund platform 102 maycommunicate with a custodian 116 (or transfer agent, or combination ofthese, referred to herein for simplicity as the “custodian 116”)responsible for holding and transacting in fund assets in a custodialcapacity. Thus, while an investment company that operates the fundplatform 102 may control the composition of a fund, trade executions onbehalf of the investment company may be performed through the custodian116. This may include transactions in the primary market 108, such asETF share creations and redemptions, as well as transactions in thesecondary markets 110, e.g., to adjust holdings of the fund under thedirection of a portfolio manager. The fund platform 102 may also becoupled in a communicating relationship with a data network 117, whichmay be used, e.g., to publish fund information, substitute basketinformation, pricing and valuation metrics for the fund, and so forth.

In one aspect, some or all of the data in the asset ledger and otherdata stored by the fund platform 102, such as transaction histories,share types and allocations, fund holdings, ownership information, andso forth may be maintained using a block chain or other distributedledger or the like in order to facilitate improved transparency,transaction authentication, and so forth. Similarly, the other platforms(such as the ABD platform 104 and the AP platform 106) may also orinstead use distributed ledgers to log transaction histories, sharedata, authenticate transactions, and so forth. While distributed ledgersare well known and supported by a variety of consensus-basedtechnologies, other centralized technologies may also or instead be usedto store and maintain data while similarly supporting transparency,authentication, and so forth.

The ABD platform 104 may participate in ETF creation and redemptionprocesses at the instruction of the authorized participant, as moregenerally described herein. The ABD platform 104 may store an assetledger of assets owned or controlled by the affiliated broker-dealer(such as assets controlled on behalf of the AP), along with other datauseful for transacting in financial assets and ETF shares as describedherein. In one aspect, the ABD platform 104 may usefully separate the APplatform 106 from the fund platform 102 so that the fund platform 102can transact in a fund basket while the AP platform transacts in asubstitute basket. In such transactions, the ABD platform 104 mayconvert holdings between these two baskets in a manner that permitsin-kind transactions by the AP platform 106 using the substitute basketwhile shielding the fund platform 102 from disclosing the composition ofthe fund, e.g., through disclosure of the fund's creation basket. Ingeneral, the ABD platform 104 may be coupled in a communicatingrelationship with the AP platform 106 and the fund platform 102 (via thecustodian 116) in order to participate in primary market 108transactions for ETF shares. The ABD platform 104 may also be coupled tothe secondary markets 110 in order to transact in securities and otherassets as necessary to convert between the creation basket and thesubstitute basket. The ABD platform 104 may also be coupled in acommunicating relationship with the data network 117 in order to supportcommunications with other market participants, retrieve market data,publish ABD platform 104 information, and so forth.

In general, the terms “creation basket” and “fund basket” are usedherein to refer to a basket of securities that the fund is willing toaccept or deliver against a subscription or redemption request of ETFshares. Such a creation basket or fund basket may include, or beaccompanied by a cash balance as needed to adjust the value of thebasket in order to match the value of a corresponding creation unitwithout the use of fractional shares or the like.

The AP platform 106 may generally facilitate the creation and redemptionof ETF shares to increase or decrease ETF shares in the secondarymarkets 110. In general, the AP platform 106 may monitor a price of ETFshares in the secondary markets 110, and where the ETF shares appear totrade at a discount or premium to a (per share) net asset value, mayresponsively add ETF shares through an ETF creation process or removeETF shares through a redemption process. In general, An AP can purchaseor redeem creation units from a fund either as a principal for the AP'sown account or as an agent for others, such as market makers,proprietary trading firms, hedge funds, or other institutionalinvestors. An AP may also keep some ETF inventory on the books forliquidity or for hedging purposes.

In one aspect, ETF shares may be created or redeemed in the system 100without concurrently revealing the complete fund composition to thesecondary markets 110. For example, the AP platform 106 may initiatecreation or redemption of creation units of ETF shares using asubstitute basket of securities rather than a fund basket, and maytransact through the ABD platform 104 in order to prevent disclosure ofthe fund composition to the AP platform 106 during such transactions. Inorder to accomplish this, the fund platform 102 may disclose the fundbasket composition to the ABD platform 104 (e.g., so that the ABDplatform 104 can accurately translate between the fund basket and thesubstitute basket), but does not disclose the fund basket composition tothe AP platform 106.

Because the fund composition is not publicly disclosed, the fundplatform 102 may provide other valuation or pricing information toassist markets in assessing the value of ETF shares. For example, inorder to reduce price discrepancies between ETF NAV and the secondarymarket price of ETF shares, the fund platform 102 may frequently publishan indicator of share value such as an estimate based on the fundholdings, an indicative net asset value, or a value of the substitutebasket (e.g., once every 1 second, 2 seconds, 5 seconds, 10 seconds, 15seconds, 1 minute, 2 minutes, 5 minutes, 10 minutes, 15 minutes, etc.)along with some combination of other valuation metrics, such as thepercentage weight overlap between the substitute basket (e.g., for thecurrent day or the prior day) and the holdings of the ETF that formedthe basis for the last NAV calculation (e.g., the last daily NAV), dailydeviation between the performance of the substitute basket and the ETF,any other quantitative measures designed to facilitate an effectivearbitrage mechanism, and/or any suitable combination of the foregoing.These substitute basket metrics allow market participants toindependently calculate a real-time value of the substitute basket orotherwise estimate a net asset value for ETF shares, therebyfacilitating arbitrage, hedging, and secondary market transactions.

Each platform in the primary market 108 may include a trade executionengine (not shown) for executing transactions in the primary market 108,and may be operatively coupled to other primary market participants forinitiating and confirming transactions in the primary market 108, asillustrated by an arrow 120. The participants may also generally becoupled, either directly or through a market maker 112, to the secondarymarkets where shares in various financial assets can be purchased andsold as necessary to adjust holdings of the fund, convert between a fundbasket and the substitute basket, or otherwise engage in transactionsconsistent with the methods and systems described herein. The marketmaker 112 may also more generally provide liquidity in the secondarymarket 110 for ETF shares and the other underlying securities and otherassets described herein.

In general, the traders 114 may include individual investors (actingthrough brokers), institutional investors, or any other investors whomight buy and sell ETF shares on the secondary markets 110. The traders114 may also include brokers who wish to buy or sell retail quantitiesof ETF shares for their own account. Large institutional investors maybuy or sell ETF shares on the secondary markets 110, or throughalternative trading venues such as Over-the-Counter and Dark Pools (notshown).

The custodian 116 (and/or transfer agent) generally facilitatesactivities of the fund platform 102 in a custodial capacity. Forexample, the fund platform 102 may communicate market trades to thecustodian 116, as well as details of the creation basket, creation andredemption requests, and so forth. The custodian 116 in turn providessafekeeping of fund assets, and may provide aggregate fund information,settlement information, and so forth to the investment company operatingthe fund platform 102. The custodian 116 may also work with the fundplatform 102 to process and settle creations and redemptions when ordersare received from the AP platform 106. The custodian 116 may alsoprovide other supporting functions, such as nightly communication ofcreation/redemption baskets to the National Securities ClearingCorporation (or the Depository Trust Company or similar entity), whichin turn may communicate this information to the secondary markets 110.

As used herein, the term “platform” may refer to one or more computers,microprocessors, logic devices, servers, or other devices configuredwith hardware, firmware, and software to carry out one or more of thecomputerized techniques described herein. Processors and processingdevices may also include one or more memory devices for storing inputs,outputs, and data that are currently being processed. It will beunderstood that FIG. 1 is illustrative only, and that any number oftraders 114, market makers 112, AP platforms 106, and so forth mayparticipate in the system 100 without departing from the scope of thisdisclosure.

FIG. 2 is a diagram of a computer system 200 for use in the methods andsystems described herein. In general, the device 200 of FIG. 2 may beused to implement the fund platform 102, the ABD platform 104, the APplatform 106 as described above and herein, or any of the otherplatforms or entities described herein, and may also or instead be usedto perform various steps of the methods described herein, e.g., whenprogrammed by computer executable code stored in memory and executableby a processor.

The computer system 200 may include a computing device 210 connected toa network 202, e.g., through an external device 204. The computingdevice 210 may be or include any type of network endpoint or endpointsas described herein. For example, the computing device 210 may include adesktop computer workstation. The computing device 210 may also orinstead be any other device that has a processor and communicates over anetwork 202, including without limitation a laptop computer, a desktopcomputer, a personal digital assistant, a tablet, a mobile phone, atelevision, a set top box, a wearable computer, and so forth. Thecomputing device 210 may also or instead include a server, or it may bedisposed on a server or within a virtual or physical server farm. Incertain aspects, the computing device 210 may be implemented usinghardware (e.g., in a desktop computer), software (e.g., in a virtualmachine or the like), or a combination of software and hardware (e.g.,with programs executing on the desktop computer), and the computingdevice 210 may be a standalone device, a device integrated into anotherentity or device, a platform distributed across multiple entities, or avirtualized device executing in a virtualization environment.

The network 202 may include any network or combination of networks, suchas one or more data networks or internetworks suitable for communicatingdata and control information among participants in the computer system200. The network 202 may include public networks such as the Internet,private networks, and telecommunications networks such as the PublicSwitched Telephone Network or cellular networks using third generationcellular technology (e.g., 3G or IMT-2000), fourth/fifth generationcellular technology (e.g., 4G, LTE, MT-Advanced, E-UTRA, 5G, etc.) orWiMax-Advanced (IEEE 802.16m)) and/or other technologies, as well as anyof a variety of corporate area, metropolitan area, campus, or otherlocal area networks or enterprise networks, along with any switches,routers, hubs, gateways, and the like that might be used to carry dataamong participants in the computer system 200. The network 202 may alsoinclude a combination of data networks, and need not be limited to astrictly public or private network.

The external device 204 may be any computer or other remote resourcethat connects to the computing device 210 through the network 202. Thismay include threat management resources such as any of thosecontemplated above, gateways or other network devices, remote servers orthe like containing content requested by the computing device 210, anetwork storage device or resource, a device hosting content, or anyother resource or device that might connect to the computing device 210through the network 202.

The computing device 210 may include a processor 212, a memory 214, anetwork interface 216, a data store 218, and one or more input/outputdevices 220. The computing device 210 may further include or be incommunication with one or more peripherals 222 and other externalinput/output devices 224.

The processor 212 may be any as described herein, and in general may becapable of processing instructions for execution within the computingdevice 210 or computer system 200. In one aspect, the processor 212 maybe capable of processing instructions stored in the memory 214 or on thedata store 218.

The memory 214 may store information within the computing device 210 orcomputer system 200. The memory 214 may include any volatile ornon-volatile memory or other computer-readable medium, including withoutlimitation a Random-Access Memory (RAM), a flash memory, a Read OnlyMemory (ROM), a Programmable Read-only Memory (PROM), an Erasable PROM(EPROM), registers, and so forth. The memory 214 may store programinstructions, program data, executables, and other software and datauseful for controlling operation of the computing device 210 andconfiguring the computing device 210 to perform functions for a user.While a single memory 214 is depicted, it will be understood that anynumber of memories may be usefully incorporated into the computingdevice 210. For example, a first memory may provide non-volatile storagesuch as a disk drive for permanent or long-term storage of files andcode even when the computing device 210 is powered down, and a secondmemory such as a random-access memory may provide volatile (but higherspeed) memory for storing instructions and data for executing processes.

The network interface 216 may include any hardware and/or software forconnecting the computing device 210 in a communicating relationship withother resources through the network 202. This may include connections toresources such as remote resources accessible through the Internet, aswell as local resources available using short range communicationsprotocols using, e.g., physical connections (e.g., Ethernet), radiofrequency communications (e.g., WiFi or Bluetooth), opticalcommunications, (e.g., fiber optics, infrared, or the like), ultrasoniccommunications, or any combination of these or other media that might beused to carry data between the computing device 210 and other devices.The network interface 216 may, for example, include a router, a modem, anetwork card, an infrared transceiver, a radio frequency (RF)transceiver, a near field communications interface, a radio-frequencyidentification (RFID) tag reader, or any other data reading or writingresource or the like. More generally, the network interface 216 mayinclude any combination of hardware and software suitable for couplingthe components of the computing device 210 to other platforms, computingor communications resources, and so forth.

The data store 218 may be any internal memory store providing acomputer-readable medium such as a disk drive, an optical drive, amagnetic drive, a flash drive, memory card, or other device capable ofproviding mass storage for the computing device 210. The data store 218may store computer readable instructions, data structures, programmodules, and other data for the computing device 210 or computer system200 in a non-volatile form for subsequent retrieval and use. The datastore 218 may store computer executable code for an operating system,application programs, and other program modules, software objects,libraries, executables, and the like the like. The data store 218 mayalso store program data, databases, files, media, and so forth.

The input/output interface 220 may support input from and output toother devices that might couple to the computing device 210. This may,for example, include serial ports (e.g., RS-232 ports), universal serialbus (USB) ports, optical ports, Ethernet ports, telephone ports, audiojacks, component audio/video inputs, HDMI ports, and so forth, any ofwhich might be used to form wired connections to other local devices.This may also or instead include an infrared interface, RF interface,magnetic card reader, or other input/output system for coupling in acommunicating relationship with other local devices.

The peripherals 222 may include any device or combination of devicesused to provide information to or receive information from the computingdevice 210. This may include human input/output (I/O) devices such as akeyboard, a mouse, a mouse pad, a track ball, a joystick, a microphone,a foot pedal, a camera, a touch screen, a scanner, or other device thatmight be employed by the user 230 to provide input to the computingdevice 210. This may also or instead include a display, a speaker, aprinter, a projector, a headset or any other audiovisual device forpresenting information to a user or otherwise providing machine-usableor human-usable output from the computing device 210. The peripheral 222may also or instead include a digital signal processing device, anactuator, or other device to support control of or communication withother devices or components.

Other hardware 226 may be incorporated into the computing device 210such as a co-processor, a digital signal processing system, a mathco-processor, a graphics engine, a video driver, and so forth. The otherhardware 226 may also or instead include expanded input/output ports,extra memory, additional drives (e.g., a DVD drive or other accessory),and so forth.

A bus 232 or combination of busses may serve as an electromechanicalplatform for interconnecting components of the computing device 210 suchas the processor 212, memory 214, network interface 216, other hardware226, data store 218, and input/output interface 220. As shown in thefigure, each of the components of the computing device 210 may beinterconnected using a system bus 232 or other communication mechanismfor communicating information.

Methods and systems described herein can be realized using the processor212 of the computer system 200 to execute one or more sequences ofinstructions contained in the memory 214 to perform predetermined tasks.In embodiments, the computing device 210 may be deployed as a number ofparallel processors synchronized to execute code together for improvedperformance, or the computing device 210 may be realized in avirtualized environment where software on a hypervisor or othervirtualization management facility emulates components of the computingdevice 210 as appropriate to reproduce some or all of the functions of ahardware instantiation of the computing device 210.

FIG. 3A illustrates a method for creation of a substitute basket. Ingeneral, the substitute basket may be advantageously engineered to servea number of separate functions that collectively facilitate efficienttrading in ETF shares concurrently with limited disclosure of fundholdings. In one aspect, the substitute basket is configured to have avalue that closely tracks the net asset value of the fund, e.g., byoptimizing to keep a forecasted daily tracking error (relative to thefund) below a predetermined threshold such as below five basis points.The substitute basket may also concurrently be configured to obfuscatefund holdings by maintaining an active share of the substitute basket(relative to the fund) above a predetermined threshold or within apredetermined range, such as 5-20% or 5-30%. The substitute basket isalso configured to support in-kind transactions by APs using thesubstitute basket instead of a creation basket for the fund, which wouldotherwise reveal holdings of the fund. This function of the substitutebasket is supported in part by the high correlation to the fund value,but can also usefully be augmented by optimizing for liquidity, e.g., bycontrolling the active share in a manner that minimizes transactioncosts or otherwise encourages a substitute basket with sufficientlyliquid for efficient trading. While optimizing for all of theseparameters that support use of the substitute basket as describedherein, the foregoing process may also provide some limited control to aportfolio manager over whether specific assets of the fund are includedin, or excluded from, the substitute basket.

As shown in step 302, the method 300 may include acquiring stored funddata, such as data stored by the fund platform. For example, this mayinclude the fund composition more specifically characterized by aselection and weighting of financial assets held by the fund, along withthe net asset value (NAV) for a most recent NAV strike. In anotheraspect, this may include asset types and/or asset allocations forfinancial assets held by the fund. For example, this may include assetclasses such as stocks, bonds, cash, real estate, commodities, financialderivatives, and so forth. This may also include sector allocations,currency allocations, geographic allocations, and any other types ofallocations useful for estimating the expected performance andcorrelation of various financial assets. For example, in a fixed incomecontext, performance or valuation metrics may include credit quality,duration, interest rate, maturity, and so forth.

One useful metric for a substitute basket is the transaction costsassociated with trading assets in the substitute basket, or theliquidity of the substitute basket, which is generally (although notuniversally) inversely related to the transaction cost for trading ineach of the financial assets in the substitute basket. That is, for aparticular asset, the transaction costs will tend to decrease asliquidity increases. A metric for either liquidity or transaction costsmay be used to evaluate the substitute basket, with a more liquidportfolio generally being more desirable due to lower transaction costsin trading of the underlying securities. Thus for example, acquiringstored fund data may include acquiring a transaction cost metric such asbid-ask spreads, volatility, median daily dollar volume or share volume,actual transaction costs associated with trades, commissions for trades,or any other direct or indirect measures of liquidity for variousfinancial assets. Certain of these metrics are calculated over a periodof time, and reflect variability in the underlying price or volume thatmay affect expected liquidity. It will be appreciated that some of thesemetrics are time-based, for which a longer window may tend to mute shortterm trends while a shorter window may provide too small a sample tocapture price behavior. One of ordinary skill in the art will appreciatethis trade off, and may make suitable selections to obtain metrics thatserve as a useful proxy for transaction costs. For example, the dollaror share volume may be measured over a predetermined historical windowsuch as five days, ten days, or twenty days, whereas the pricevolatility might typically be measured over a longer window such as amonth or more.

According to the foregoing, it will be understood that the method 300may also include storing the corresponding information, e.g., in a datastore associated with the fund platform. Thus for example, the method300 may include storing a composition of the fund, the compositionincluding a selection and weight for a number of financial assets heldby the fund. The method 300 may also or instead include storing atransaction cost metric for each of the number of financial assets. Themethod 300 may also include storing a number of asset types, each assettype having a number of categories exhaustively characterizing thefinancial assets held by the fund.

In one aspect, the fund data may include inclusion scores provided by aportfolio manager. Inclusion scores may provide a mechanism for aportfolio manager to control, within certain constraints, whether theselection and/or weighting of particular financial assets held by thefund are to be disclosed in a substitute basket. For example, a positivevalue for one of the inclusion scores may weight a corresponding one ofthe number of financial assets to favor inclusion in the substitutebasket, a negative value for one of the inclusion scores may weight oneof the number of financial assets to favor exclusion from the substitutebasket, and a zero inclusion score may reduce the effect of the currentweighting of an asset in the fund on inclusion of the asset in thesubstitute basket. Using these tools, negative inclusion scores may beapplied by an optimization engine to discourage the inclusion of assetsin the substitute basket, and positive inclusion scores may be appliedby the optimization engine to encourage the inclusion of assets in thesubstitute basket. In one aspect, high positive inclusion scores may beused to encourage the inclusion of assets that are not currently in thefund holdings (e.g., with an actual, current weight of 0%). Highnegative inclusion scores may be used to encourage the exclusion ofassets from the substitute basket (e.g., to obtain an adjusted weight of0%). It will be understood that other ranges of inclusion values, orother weighting techniques or the like, may also or instead be used,provided they generally facilitate user control over biasing aparticular asset toward inclusion in or exclusion from a substitutebasket.

In one aspect, the portfolio may initially be weighted with an inclusionscore of one for each financial asset, and the portfolio manager may beprovided with a budget (e.g., of 50 points for inclusion, and −50 pointsfor exclusion) to allocate as desired to encourage or discourage theinclusion of particular assets in the substitute basket. It will beunderstood that these inclusion and exclusion budgets are somewhatarbitrary, and may be scaled or allocated in any useful proportionaccording to the manner in which a particular optimization enginegenerates substitute basket holdings, and/or the degree to which aportfolio manager is permitted to control allocations. These inclusionscores (one for each financial asset) may be received from the portfoliomanager, e.g., in a user interface for the fund platform, and used by anoptimizer as described herein to select and weight assets in asubstitute basket that is representative of, but not identical to, acomposition of financial assets held by the fund.

As shown in step 304, the method 300 may include constructing thesubstitute basket within provided constraints. The constraints mayinclude user-provided constraints, system provided constraints, or somecombination of these. For example, the inclusion and exclusion scoresmay be provided, as well as an active share window, a forecasted dailytracking error threshold, asset correlations, minimum position sizes,and so forth.

In one aspect, constructing the substitute basket may includedetermining an adjusted weight for each financial asset in thesubstitute basket according to an objective function that maximizes aweighted average inclusion score and minimizes transaction costs for thesubstitute basket, while constraining the adjusted weights such that:(1) allocations in the substitute basket remain within a predeterminedpercentage for each of the number of categories for each asset type heldby the fund, (2) the substitute basket has an active share within apredetermined range, (3) the adjusted weight is no less than one tenthof one percent for any non-zero adjusted weight, and (4) the substitutebasket has a forecasted daily tracking error less than or equal to apredetermined threshold. The predetermined range for active share mayvary according to asset types. For example, for funds composed of U.S.securities or the like, the active share window may be 5-20%, while forfixed income funds, an active share window of 5-30% may be appropriate.For a substitute basket using liquid securities, or highly liquidsecurities such as equities with high daily trading volumes, theforecasted daily tracking limit by be lower, such as within 1%. Moregenerally, any window size for active share may be used consistent withthe opposing criteria of shielding asset disclosures and providingcorrelated price performance.

By way of a more specific example, optimization constraints may includean active share between 5-20%, while the category allocations such ascountry, currency, and Global Industry Classification Standard sectorare maintained within +/−3% of the underlying portfolio. The GlobalIndustry Classification Standard is an industry taxonomy currentlyincluding 11 sectors, 24 industry groups, 69 industries, and 158sub-industries used to categorize publicly traded companies by theirprincipal business activity. It will be understood that other taxonomiessuch as the FTSE's Industry Classification Benchmark may also or insteadbe used to classify industries associated with financial assets. Otheroptimization constraints may also be provided to facilitate the creationof a useful substitute basket. For example, cash may preferably matchthe underlying portfolio to within 0.001%, or more closely wherepractical. Other instruments such as futures, options, derivatives, andthe like may also or instead have specific matching thresholds, or maybe valued as cash-in-lieu of securities for purposes of optimization (ortransacting), particularly where the underlying asset is difficult orimpossible to transfer in-kind. In another aspect, the minimum positionsize for any asset in the substitute basket may be a weight of 0.1% inorder to provide asset positions in transactable sizes. It will beappreciated that this 0.1% minimum may vary according to the size of thecreation unit or substitute basket. That is, as a substitute basketbecomes smaller, it may be appropriate to increase the size of thisminimum weight in order to avoid fractional shares or the like withinthe substitute basket. Similarly, for larger substitute baskets, asmaller minimum weight (e.g., 0.05% or less) may be appropriate.

In one aspect, one or more of the inclusion scores may be zero. Asillustrated in the objective function below, this may have the effect ofreducing the effect of a corresponding asset's weight in the fund onthat assets weight within the substitute basket. This does not mean thatthe asset will necessarily be excluded from the substitute basket. Anasset with a zero inclusion score may nonetheless be placed in thesubstitute basket, e.g., due to a relatively large liquidity scoreand/or a relatively small penalty score. A zero inclusion score may beused in other ways. For example, certain stocks (or other assets) thatare not in the fund basket may be assigned a zero inclusion score. Thiswill bias these stocks against inclusion in the substitute basket, andas a result will tend to favor substitute selections from within thefund. Among other advantages, the resulting substitute basket may havelower transaction costs during creates and redeems. In general, an assetsuch as a stock may have an inclusion score greater than zero to favorinclusion in the substitute basket, less than zero to favor exclusionfrom the substitute basket, and zero to reduce the effect of the assetweightings within the fund on scoring with the objective function [Eq.1] that is used to create the substitute basket.

In another aspect, the forecasted tracking error may be capped daily orannually. For example, the forecasted daily tracking error may have alimit of five basis points, or some other amount suitable to theunderlying securities and/or asset classes. While five basis pointsprovides a useful threshold for U.S. equities (or some similar thresholdsuch as ten basis points or fifteen basis points), other thresholds maybe used for other asset types. For example, a limit of thirty basispoints may be used for international equities or other assets withgreater volatility. As another example, a forecasted yearly trackingerror may have a limit of about eighty basis points for U.S. equities,or some other amount suitable to the underlying securities and/or assetclasses. More generally, any limit(s) or range(s) suitable forparticular asset types and consistent with partial obfuscation of fundholdings may be used as a forecasted tracking error with the methods andsystems described herein.

A variety of optimization tools are available for the analysis offinancial assets. While these tools are conventionally applied to managerisk and expected returns, they may also be usefully adapted to generatesubstitute baskets meeting the constraints contemplated herein. Ingeneral, the substitute basket partially obfuscates holdings of a fund,while providing sufficient compositional similarity to facilitatein-kind transactions based on the substitute basket and sufficientsimilarity in pricing behavior to provide a useful signal of fund valueduring a trading day. At the same time, a basket generation tool willusefully permit a portfolio manager to over-represent or under-representassets of the fund basket within the substitute basket. In one aspect,these competing constraints may be satisfied using an optimization thatseeks to maximize a corresponding objective function. For example, auseful objective function may take the general form:

f(x)=k ₁ l _(x) +k ₂ L _(x) +k ₃ P _(x)  [Eq. 1]

where k₁ is an inclusion constant, I_(x) is the weighted averageinclusion score (e.g., the product of the inclusion score and theweighting) for the x^(th) asset, k₂ is a liquidity constant, L_(x) isthe liquidity metric (or inverse or negative of a transaction costmetric) for the x^(th) asset, k₃ is a penalty constant, and P_(x) is asum of penalties for the x^(th) asset. This objective function may beoptimized to maximize the objective function for a collection of assets,which may exclude some of the assets in the fund basket and which mayinclude some assets that are not in the fund basket. Using theseconstraints, an optimizer may identify a set of active weights oradjustments to weightings of the fund basket to satisfy:

max Σ_(n=1) ^(x) f(x)  [Eq. 2]

for assets 1 through x in a group of assets in the fund basket whileremaining within other constraints for the substitute basket asdescribed herein. The penalty constant and the penalties may be used toimplement soft constraints to impose selection preferences without usingrigid requirements. For example, a substitute basket may have an activeshare maximum of 20%. In order to discourage approaching this limit, alinear penalty of one point for each percent of active share over 10%may be applied. In another aspect, including a negatively scored assetmay incur a penalty score linearly related to a magnitude of thenegative score. Any number of additional soft constraints may berealized using this penalty framework, and may guide the optimizationtoward desirable results. In one aspect, the optimizer may automaticallyselect additional assets for replacement of assets in the fund based on,e.g., asset type, sector, currency, and so forth. In another aspect, auser may specify one or more replacement assets, e.g., by explicitlyadding the assets to the fund with a current weighting of zero andadding an inclusion score indicative of a preference for including thecorresponding asset in the substitute basket.

A factor analysis or the like may concurrently be used to maintainsuitable category allocations, or the model may apply penalty scores todiscourage selections outside the intended categories when optimizingthe objective function.

In principle, any of a number of optimization techniques or optimizationengines may be employed to maximize the weighted average inclusion scoreand meet the constraints above. A number of commercial alternativesexist for optimizing in a manner that controls risk contributions anduncertainties, controls exposure to countries, currencies, and industrysectors, and controls tracking errors, while also providing thresholdsto limit or remove undesirably small positions from reported results.While such tools and techniques are known for use in problems such as,e.g., maximizing returns subject to a tracking error and linearconstraints, these tools can be adapted to more specifically yield ahigh quality, highly correlated substitute basket as contemplatedherein. In particular, a portfolio manager can maintain a predeterminedlevel of (forecasted) correlation to the underlying fund by targeting aparticular tracking error, while also controlling the amount ofobfuscation of the underlying assets associated with the active sharewindow. That is, the optimizer can maximize the weighted averageinclusion score for the substitute basket while generating apredetermined amount of active share that contributes to the trackingerror.

The foregoing techniques can usefully support the creation of asubstitute basket meeting various constraints, and can advantageously beadapted to use any of a variety of commercially availablefinancial/investment optimization tools. However, it will be understoodby one of ordinary skill in the art that other techniques such as expertsystems, machine learning, and the like, may also or instead be used torecommend weightings for a substitute portfolio meeting the variouscriteria described herein, and may be used alone or in combination withthe techniques above to configure substitute baskets. All suchtechniques are intended to fall within the scope of configuringsubstitute baskets as described herein, unless a different meaning isexplicitly provided or otherwise clear from the context.

As shown in step 306, the method 300 may include storing and publishingsubstitute basket information. The substitute basket may usefully becreated and published before each trading day (for a market in the ETFshares) in order to ensure that the substitute basket is suitablyaligned to the current fund holdings, and to ensure that the forecastedtracking error is within the desired target range. This substitutebasket may be used, among other things, for market participants to valueshares of the fund without receiving direct information about thecomposition of the fund.

It will be noted that the fund may provide other information in additionto the selection and weighting of assets in the substitute basket. Forexample, the method 300 may include publishing an indicative net assetvalue for the fund periodically, e.g., once per second, once every fiveseconds, or at least once every fifteen seconds throughout the tradingday. The indicative net asset value may include an estimate of a valueof the fund based on, e.g., the proxy portfolio, assets correlated tofund assets, reported asset prices, fair valuation estimates, or anyother suitable data or valuation metrics.

The method 300 may also or instead include publishing a net asset valuefor the fund two or more times during the trading day for the market.Because the substitute basket may deviate from the fund value over thecourse of a trading day, the fund platform may usefully strike a netasset value for the fund multiple times during the trading day. This mayimpose administrative burdens on the fund, and as such, may mostadvantageously be performed a limited number of times, and preferably attimes with the greatest market relevance. For example, the fund mayinclude at least one asset traded on a secondary market that is closedfor at least a portion of the trading day for the market, such as aforeign equity traded on a foreign stock exchange. If the foreign marketcloses at, e.g., 10:00 a.m., the net asset value for a fund thatincludes securities traded on that foreign market may usefully becalculated at 10:00 a.m., at or immediately after the close of theforeign market. Similarly, bond, currency, commodity, and futuresmarkets may close at different times, and may suggest different NAVstrike times according to the quantity and type of assets held by thefund. At the same time, one or more NAV strikes may usefully becalculated at about a midpoint of the remaining trading day, and/or atother intervals, to provide additional intraday opportunities for ETFcreations or redemptions at a known NAV for the fund.

As shown in step 308, the method 300 may include monitoring performanceof the substitute basket. For example, this may include receiving marketdata such as current asset prices and periodically calculating (andoptionally publishing) a value of the substitute basket. This may alsoor instead include monitoring (and optionally publicly reporting) adeviation between the substitute basket and the fund basket during thetrading day. In this context, the deviation generally refers to thedivergence between the price of the substitute basket and the price ofthe fund basket (e.g., on a per share basis), although other terms suchas “divergence” or “ex post tracking error” may also or instead be usedto describe an instantaneous difference between a value of the fundbasket and the substitute basket. More generally, a variety ofbenchmarks or metrics may be used in this context to indicate thedifference between the return achieved by the substitute basket and thereturn achieved by the fund basket, and any such metric may usefully bepublished in this context to provide information for comparing the priceperformance of the substitute basket to the fund basket.

One concern for a substitute basket is that, despite modeling with thebest available information and optimization engine(s), the substitutebasket may deviate substantially from the fund basket (e.g., well beyonda forecasted tracking error of one standard deviation of historicalerror for the substitute basket) because of price variations specific tocertain securities in the portfolio, changes in the fund composition, orother causes. In order to address these types of significant deviations,the method 300 may also include providing a signal for fund interventionwhen the daily tracking error exceeds a predetermined limit, such as alimit greater than the predetermined threshold, or greater than twicethe predetermined threshold. A portfolio manager may respond bypublishing a notification of the amount or cause of the deviation, orthe underlying securities related to the deviation. The portfoliomanager may also or instead deploy other remediations such as initiatingan intraday revision to the substitute basket, updating the basis forcalculating an indicative net asset value, updating the estimatedtracking error, or otherwise providing information or revisingcalculations used by the market to value ETF shares.

As shown in step 310, the method 300 may include storing daily trackingerror information. This information may be published and/or usedinternally by the fund in order to evaluate, over extended intervalssuch as weeks, months, and years, how accurately the substitute basketis tracking the fund basket.

FIG. 3B illustrates a user interface for creation of a substitutebasket. In general, the interface 350 may include a portfolio selectiontool 352, a number of basket action tools 354, a statistics display 356,and a basket creation window 358. The interface 350 may be rendered by alocal application executing on a computing device and communicating withexternal resources such as the fund platform (for fund basketinformation) and a third party optimization engine (for calculation ofadjusted weights). In another aspect, the interface 350 may be hosted ona remote platform such as the fund platform and locally rendered for auser in a web browser or other local client application or the like.

The portfolio selection tool 352 may provide a drop down list or othertool for selecting any of a number of portfolios to be managed in theinterface 350. For example, a portfolio manager may log in to the fundplatform through the interface 350, and receive access to any of anumber of portfolios that the portfolio manager is responsible for, orthat the portfolio manager otherwise has authority to review. In oneaspect, the rights granted within the interface 350 may beuser-dependent. For example, the list of available portfolios providedby the selection tool may depend upon the particular user, andinteraction with the basket creation window 358, e.g., to adjust theinclusion scores or add assets for use in the substitute basket maydepend on whether a user is authorized to make changes to the fundholdings or the substitute basket. Furthermore, while the presentdisclosure may emphasize creation of the substitute basket rather thanmanagement of the underlying fund, the interface 350 may also or insteadinclude controls for modifying the selection and weighting of assetswithin the fund. While a drop down list is shown as the portfolioselection tool 352, it will be understood that any of a variety of otheruser interface tools or controls may be provided by the interface 350for selection of a portfolio.

The basket action tools 354 may include any actions useful for managinga substitute basket for a fund as described herein. For example, thebasket action tools 354 may include a tool to run a basket optimization,e.g., to generate a substitute basket based on a current selection ofinclusions scores, or a tool to publish a basket, e.g., once asubstitute basket has been created that satisfies the portfolio manageror other personnel. The basket action tools 354 may be realized asbuttons or other controls within the interface 350.

The statistics display 356 may present statistics for a currentsubstitute basket that has been created by a basket optimization engineaccessed through the interface 350. The statistics display 356 may, forexample, present descriptive statistics or other statistical data ormetrics for the substitute basket including data provided by the basketoptimization engine, data calculated by the fund platform, or any otherdata from any other source or combination of sources.

By way of non-limiting examples, the statistics display 356 may presentan active share of the substitute basket relative to the fund basket. Asused in the financial industry, the active share is determined bysumming the absolute value of differences between the weight of eachholding in a portfolio and a benchmark. For a portfolio with Ncomponents, this may be expressed as:

Active Share=½Σ_(i=1) ^(N) |W _(f,i) −W _(b,i)|  [Eq. 3]

Where W_(f,i) is the weight of the i^(th) component in the fund, andW_(b,i) is the weight of the i^(th) component in the benchmark, and theactive share is reported as a percentage. In general, the active shareis a useful metric for measuring the relationship between a portfolioand a benchmark, and is commonly used in the financial industry toexpress the degree to which an active manager is deviating from theunderlying benchmark in an effort to secure greater returns, adjustrisk, or some combination of these. As contemplated herein, this metricis used instead to directly control the amount of difference between thepublic-facing substitute basket and the non-disclosed fund basket withina specific window, more specifically so that the fund basket maintains acontrolled degree of obfuscation to shield active management decisionswhile still reflecting the composition of the fund closely enough toprovide a useful pricing signal to the secondary market and support ETFshare transactions such as hedging and in-kind creation/redemption inthe primary market.

In another aspect, the statistics display 356 may present a forecastedtracking error (also referred to herein as an “estimated trackingerror”), which may be expressed, e.g., in a dimensionless value such asbasis points relative to the underlying portfolio. As used in thefinancial industry, the historical tracking error is commonly calculatedas the standard deviation of the difference between returns of aportfolio and a benchmark over time:

$\begin{matrix}{{TE} = \sqrt{\frac{\sum\limits_{i = 1}^{n}\; \left( {R_{p} - R_{b}} \right)^{2}}{n - 1}}} & \left\lbrack {{Eq}.\mspace{14mu} 4} \right\rbrack\end{matrix}$

Where TE is the tracking error, R_(p) is the portfolio return, R_(b) isthe benchmark return (and R_(p)−R_(b) is the active return for theportfolio relative to the benchmark), and n is the number of timeperiods over which the tracking error is calculated. This historicaltracking error (also referred to as the realized or ex-post trackingerror) is conventionally used to measure the historical performance,e.g., the relative success of active management versus a benchmark, andmay be used in the context of substitute basket creation to evaluatewhether a particular basket has historically tracked well with a fundbasket (e.g., the historical tracking error is small).

However, the forecasted tracking error (also referred to as an estimatedtracking error, predicted tracking error, or ex-ante tracking error) mayprovide a better metric for whether a substitute basket is likely totrack with the fund basket over the course of an upcoming trading day.Various types of ex-ante tracking error models are used in the financialindustry, and/or commercially available from third party providers, manyof which may be useful in calculating a forecasted tracking error for asubstitute basket as contemplated herein. The ex-ante tracking error canbe evaluated using models that range from simple equity models tocomplex multi-factor models. For example, a simple model may use beta (aratio of covariance of an asset and the index to the variance of theindex) to measure the risk relative to a broader market such as an indexor other diversified portfolio. A more complicated multi-factor modelmay evaluate the risk based on unobserved random variables (referred toas “common factors”) that appear to influence the observed randomvariables.

An ex-ante tracking error may be calculated locally by the fund platformor with the assistance of third party optimization engines or the like.While this value is conventionally used in the financial industry toevaluate and manage risk, the ex-ante tracking error also provides auseful tool for evaluating substitute baskets as described herein. Inparticular, the ex-ante tracking error provides a useful metric for asubstitute basket because the ex-ante tracking error indicates an amountthat the substitute basket is expected to vary from the fund basket overthe course of an upcoming trading day. Thus, the tracking error moregenerally serves as a figure of merit (or more precisely, the inverse ofa figure of merit) for expected pricing accuracy, with a low ex-antetracking error suggesting that, based on a multi-factor or otheranalysis, that the substitute basket will closely track the fund basket.The tracking error may be calculated for a particular substitute basketand displayed within the statistics display 356.

The statistics display 356 may also or instead show relative weightingsof the substitute basket to the fund basket. For example, the statisticsdisplay 356 may show a basket weight of assets with negative inclusionscores. As noted herein, a negative inclusion score may indicate that aportfolio manager wishes to exclude a stock or other asset from thepublished substitute basket. Thus, a portfolio manager who hasnegatively weighted an asset may wish to check that little or none ofthat asset appears in the substitute basket, as reflected by acorrespondingly low or zero basket weighting. Thus more generally, theportfolio manager may receive an indicator of whether negative inclusionscores are yielding the desired impact on asset weightings. Similarly,the statistics display 356 may show a fund weight of negatively scoredassets, which may facilitate an immediate visual comparison of the fundbasket to the substitute basket with respect to the negatively weightedstocks.

The basket creation window 358 may permit a portfolio manager todynamically enter, and evaluate the results of, inclusion scoreselections. In one aspect, the basket creation window 358 may use aspreadsheet or similar structural metaphor in which assets are listed inrows, and features such as a description, an inclusion score, a basketweight, a fund weight, an active weight, and a contribution to thespecific risk are displayed in tabular form. The basket creation window358 may be an active window with numerous user controls available.

For example, a user such as a portfolio manager may have the ability toadd new rows, which may permit the addition of new assets to the fundbasket, or may permit the addition of new assets to the substitutebasket that are not in the fund holdings. A column for the inclusionscore may default to a weight of one, or some other suitable valueindicating a neutral weight, for all assets when a portfolio is loadedinto the interface 350, or the inclusion score may default to a mostrecent prior scoring or a last save scoring for the portfolio. Theinclusion scores may be adjusted by a user within the inclusion scorecolumn in order to reflect discretionary intent to underweight oroverweight assets in the corresponding substitute basket. When a basketoptimization is selected from the basket action tools 354, the weightsof the assets in the fund basket may be adjusted as described herein toobtain a substitute basket having a target active share and a targettracking error, and/or meeting other constraints for the substitutebasket. For each asset, e.g., for each row in the basket creation window358, a column may be provided for system input values such as thecurrent fund weight, user input values such as the inclusion score,output from an optimization engine or the like such as the substitutebasket weight, and locally calculated values such as an active weightrepresentative of a difference, for each asset, between the weighting inthe fund basket and the weighting in the substitute basket.

FIG. 4 illustrates a system for publishing valuation information. One ofthe purposes of the substitute basket described herein is to shield theselection and weighting of assets in the fund from public disclosure. Inorder to facilitate trading in ETF shares for the fund, otheralternative pricing information may be published so that marketparticipants can accurately price or estimate the value of shares.

The system 400 may include a variety of third party data sources 402that provide information useful for estimating the value of thenon-disclosed portfolio. For example, this may include market price data(for fund assets and substitute basket assets), risk models that canforecast tracking error, identify correlated assets for valuation, andso forth, evaluative engines, indicative net asset value engines, andthe like. For example, an evaluative engine may be used to estimate thevalue of assets listed on markets (e.g., foreign markets) that are notactive during the trading day for ETF shares or markets that do notpublish or report transaction activity or prices during the trading dayfor the ETF shares (such as many fixed income securities). As anotherexample, an indicative net asset value engine may be configured tocalculate an estimate of the fund NAV based on, e.g., correlated assetsor any other suitable proxies for fund component values (such as ETFsfor the like for country, sector, currency, capitalization weighting,factor, style, and so forth, as well as derivatives, American DepositaryReceipts, and so forth). The third party data sources 402 may includethese and any other data sources, calculation engines, and the like thatmay be useful in pricing calculations for ETF shares.

The fund platform 404 may receive data from the third party data sources402, and may store this along with internally generated data such asfund holdings 406 and descriptive data 408 for the fund holdings 406such as the composition of the substitute basket, the active share orportfolio overlap, an estimated tracking error, and so forth. It will beunderstood that financial data used by the fund platform 404 asdescribed herein may also or instead be generated or provided directlyby the fund platform 404 and/or the descriptive data 408 maintained bythe fund platform 404. The fund platform 404 may also or instead storeother information related to pricing of, or transactions in, fundshares. For example, the fund platform 404 may store (and optionallypublish) bid-ask spread information, all baskets of ETF shares tradingin secondary markets, and any other information required by regulatoryagencies, market participants, and so forth.

This data may be published on a publication platform (where examplepublished data 410 is included on the platform in the figure), which maybe a single platform such as a website hosted by the fund platform, or acombination of platforms. For example, certain information such as asubstitute basket for use in ETF creations and redemptions may beprovided to the National Securities Clearing Corporation or DepositaryTrust Company, which may in turn forward the information to the publicmarkets before each trading day. In general, the published data 410 mayinclude the substitute basket. In addition to the substitute basket, acharacteristics file with additional information may be disclosed tomarket participants to help efficiently price the portfolio intraday.The information contained in the characteristics file may include, butis not limited to: industry allocation, sector allocation, currencyallocation, currency hedge, country allocation, asset class allocation,market cap allocation, factor exposures, liquidity, yield, duration,convexity, credit quality, maturity bands, yield spread, ex-antetracking error between the underlying portfolio and the substitutebasket, holdings differentiation (active share, portfolio overlap, etc.)between the underlying portfolio and the substitute basket, thehistorical tracking error between the underlying portfolio and thesubstitute basket, correlations to other ETFs, futures, ADRs, and otherinstruments. The data may also or instead include currency disclosuressuch as the amount and currencies of the underlying portfolio or anyrelated currency hedges.

Other information may also or instead be included in the published data410. For example, the fund platform may strike a net asset value for thefund one or more times during the trading day, e.g., at 10:00 a.m., 1:00p.m., and 4:00 p.m., or at any other practical intervals, and thisinformation may be published by the fund platform or through any othersuitable channel. The actual NAV provides highly useful pricinginformation because it is known to accurately reflect the true price ofthe underlying securities. However, a full NAV strike is operationallydifficult, and it may not be practical to strike a NAV frequently duringeach trading day. To provide additional market information, anindicative net asset value, or “iNAV”, for the fund may be calculated atmuch more regular intervals, such as once per second, once every fiveseconds, and so on. The iNAV may, for example, be based on an actual orestimated value of fund assets, the value of one or more correlatedassets (e.g., where a current value of an asset is not immediatelyavailable), a midpoint for a national best bid and offer or one or moreof the securities in the fund, or some combination of these or othermetrics or assets providing useful indicators of the value of fundassets. While an iNAV that relies on assets other than the fund holdingsmay deviate from the actual fund NAV, such an iNAV can nonetheless relyin part on correlated assets (for which real time price information isavailable) to reduce those deviations. This may be particularlyadvantageous where the ETF includes assets that are not traded during atleast a portion of the trading day for the ETF shares. For example, ifthe ETF holds foreign securities, a real time price may not beavailable, and a proxy such as an American Depositary Receipt may beused as a close alternative for calculating an iNAV. The net asset valuefor the substitute basket may also or instead be periodically calculatedand published through any suitable medium. In another aspect, the netasset value for the substitute basket may be periodically calculated andpublished through any suitable medium.

The published data 410 may also or instead include other informationuseful for comparing the substitute basket to the fund basket orotherwise estimating the value of the fund basket. For example, adeviation between the net asset value for the substitute basket and theNAV or iNAV may be periodically calculated and published. In anotheraspect, an estimated premium or discount of the substitute basket to thefund basket, or of the ETF shares to the value of the fund basket, maybe calculated and published. In another aspect, the fund mayperiodically publish the fund composition including the selection andweighting of financial assets held by the fund. This may occur on anysuitable schedule such as once per month or once per quarter, and thepublished holdings may be lagged by an amount of time appropriate toprotect against disclosure of the current holdings (e.g., on athirty-day lag). For example, for monthly disclosures, the holdingsdisclosed on the last day of a month may be the holdings as of the firstday of the month, or a midpoint of the month. This provides periodicdisclosures of the complete fund holdings suitable for a generalevaluation of the fund holdings and strategy, without requiring adisclosure of trading strategies in real time.

The published information may be used by market participants such asAPs, market makers, and individual or institutional investors toestimate ETF share prices without knowing the complete selection andweighting of assets in the fund.

FIG. 5 illustrates a method for creating exchange-traded fund sharesusing a substitute basket. In general, an AP can receive substitutebasket information from the fund, assemble the substitute basket, andthen exchange this for a creation unit of ETF shares through the ABDplatform, which receives the substitute basket and converts it into thefund basket for in-kind exchange with the fund platform. In thisprocess, the AP platform may more specifically communicate a creationorder to the fund, deliver the substitute basket to the ABD platform,and instruct the ABD platform to convert the substitute basket into thefund basket. It will generally be noted that due to transaction costs,timing differences and other factors, there may be a cash balance due tothe AP or the fund, and this may be paid or collected as appropriate toclose the transaction. It should also be noted that, while the fundbasket will be a pro rata mirror of the fund composition if the fund isstatic, this is not necessarily always the case. Where the portfoliomanager intends to make changes to the fund, the fund basket used in thecreation process may be selected to effect some or all of the portfoliomanager's intended reconstitution of the portfolio.

It will be understood that, while the substitute basket can usefullyfacilitate an AP-initiated creation of ETF shares based on a collectionof securities having a substantial overlap with the fund basket (e.g.,through the ABD), other techniques may also or instead be used. Forexample, an AP may also or instead initiate a cash creation asillustrated in FIG. 7 or a custom basket creation as illustrated in FIG.9. In another aspect, the availability of substitute basket transactions(either for creation, or for redemption as described with reference toFIG. 6 below) may depend on the time of day at which the transaction isinitiated. For example, the net asset value for the fund may becalculated at certain times, e.g., at 12:00 noon and 4:00 p.m., or at10:00 a.m., 1:00 p.m., and 4:00 p.m. during the trading day. In thiscase, an AP may request a creation (or redemption) using the substitutebasket type before, e.g., the 1:00 p.m. NAV strike. In this case, thetransaction can be priced with a substantially contemporaneousassessment of the fund value. As long as the ABD can convert between thesubstitute basket and the fund basket relatively quickly thereafter, theAP should have a limited risk exposure that can be suitably hedged,resulting in relatively small spreads and efficient transactions. As anadditional advantage, the risk exposure is also directly managed andlimited by controlling the active share of the substitute basketrelative to the fund basket as described above. However, fortransactions that occur later in the trading day, where an actual NAVwill not be determined again until the close of trading, transactionsmay be limited to cash transactions in order to prevent an AP fromassuming overnight or other long term market risk. More generally, anETF may usefully establish different cutoff times for different types ofcreate and redeem orders, as well as for different types of assets(e.g., fixed income instruments, or foreign market securities), allwithout departing from the scope of this disclosure. For example, thefund may honor requests for conversions between substitute baskets andETF shares that are received at least one hour before any NAV strike, atthe price determined by that NAV strike.

FIG. 6 illustrates a method for redeeming exchange-traded fund sharesusing a substitute basket. At a high level, the AP platform provides ETFshares to the fund in exchange for the substitute basket. In order tofacilitate this transaction without revealing the composition of thefund basket, the ABD platform may receive the fund basket from the fundplatform and convert the fund basket into the substitute basket fordelivery to the AP platform. To initiate this process, an AP platformcan receive substitute basket information from the fund and assemble acreation unit of ETF shares, either from the APs own inventory or thesecondary markets, or some combination of these. The AP platform maythen communicate a redemption order to the fund and instruct the ABDplatform to execute trades to convert the fund basket into thesubstitute basket. As with ETF share creation as described above, thecomposition of the fund basket may deviate from the portfoliocomposition in a manner that purposefully adds securities to, or removessecurities from, the fund portfolio. It will be understood that, whilethe substitute basket can usefully facilitate an AP-initiated redemptionof ETF shares based on a collection of securities having a substantialoverlap with the fund basket, other techniques may also or instead beused. For example, an AP may also or instead initiate a cash redemptionas illustrated in FIG. 8 or a custom basket redemption as illustrated inFIG. 10.

FIG. 7 illustrates a method for creating exchange-traded fund sharesusing cash. In a cash creation process, the AP will generally providecash directly to the fund platform (or to a custodian for the fund) andrequest a creation unit of ETF shares. The fund platform may thenacquire the fund basket (e.g., through the custodian), issue a creationunit, and deliver the creation unit to the AP platform (e.g., through atransfer agent). It will be noted that the ABD platform is not generallyneeded during a cash creation because the fund can acquire the necessarysecurities directly, and the selection and weighting of assets in thefund basket would not be exposed to the AP platform.

FIG. 8 illustrates a method for redeeming exchange-traded fund sharesusing cash. In a cash redemption process, the AP platform may assemble acreation unit, e.g., by acquiring a corresponding number of ETF shareson the secondary markets, and delivering the creation unit to the fundplatform along with a request for cash. The fund platform may liquidatea fund basket (and receive a corresponding amount of cash), retire thecreation unit, and deliver the cash resulting from the liquidation tothe AP platform. Alternatively, where the fund has sufficient cashreserves, the redemption may be paid to the AP in whole or in part fromcash reserves without liquidating any securities. As with a cashcreation, in an aspect, in a cash redemption process the AP platform isnever exposed to the fund basket, so there is no need for the AP totransact through an ABD platform.

FIG. 9 illustrates a method for creating exchange-traded fund sharesusing a custom basket of securities. Under certain circumstances, suchas where the fund is adjusting the composition of the fund portfolio,the fund may offer creation transactions to APs using a custom createbasket. For example, if the fund wishes to add a particular stock to theportfolio, the fund platform may publish one or more custom createbaskets that include that particular stock, either alone or incombination with other securities, and the fund platform may invitecreate transactions from APs using these custom baskets. In the eventthat an AP wishes to transact based on one of the custom baskets, the APplatform may assemble the custom basket by acquiring the correspondingsecurities in the secondary markets, from the APs inventory, or somecombination of these. The AP platform may deliver the securities in thecustom basket to the fund platform and request a creation unit. Eachcustom basket fashioned in this manner will provide only limitedinformation about the selection and weighting of assets in the fund, soa custom basket creation may optionally be performed between the APplatform and the fund platform without any need for an ABD or othermechanism to shield information about the fund portfolio.

FIG. 10 illustrates a method for redeeming exchange-traded fund sharesusing a custom basket of securities. Under certain circumstances, suchas where the fund is adjusting the composition of the fund portfolio,the fund may offer redemption transactions to APs using a custom redeembasket. For example, if the fund wishes to remove a particular stockfrom the portfolio, the fund platform may publish a custom redeem basketthat includes that particular stock, either alone or in combination withother securities. The fund platform may publish this redeem basket, andinvite redemptions by APs using the redeem basket. In the event that anAP wishes to transact based on the custom basket, the AP platform mayassemble a creation unit of ETF shares, e.g., by acquiring the ETFshares in a secondary market, and delivering the creation unit to thefund platform along with a request for the custom redeem basket. Thefund platform may remove the securities in the custom redeem basket fromthe fund portfolio, and deliver the securities in the custom redeembasket to the AP platform. The custom redeem basket will provide onlylimited information about the selection and weighting of assets in thefund, so the custom basket redemption may be performed between the APplatform and the fund platform without any need for an ABD to shieldinformation about the fund portfolio.

Other basket creation or redemption techniques may also or instead beemployed. For example, in one aspect, the basket creation or redemptionmay use a negotiated basket, which may be created through a negotiationprocess between an AP and a fund prior to the creation/redemptiontransaction. The AP and the fund may, through a series ofcommunications, agree on a negotiated basket that includes any mutuallyagreeable assets including assets held by the fund, assets that are notheld by the fund, assets the fund wishes to dispose of, assets the fundwishes to acquire, cash, or any combination of these. Once the contentsof this negotiated basket have been agreed to by the AP and the fund, acreation or redemption may occur using the techniques described above.

FIG. 11 is a block diagram of a computerized system including anintermediary for transacting in exchange-traded funds. In general, thesystem 1100 may include any of the systems and corresponding entities,platforms, and the like described herein, and thus the same referencenumbers for these components or entities may be used in the system 1100of FIG. 11 that are used to describe other systems herein such as thesystem 100 shown in FIG. 1. Turning back to FIG. 11, in an aspect, thesystem 1100 may include an intermediary platform 1150 for one or moreintermediaries that facilitates transactions between the fund platform102 that sponsors a fund and the authorized participant platform 106that provides an interface between the fund and secondary markets 110for traders 114.

The intermediary platform 1150 may be managed by any of theintermediaries described herein, such as an affiliated broker-dealer.However, it will be understood that a variety of other intermediariesmay also or instead be employed without departing from the scope of thisdisclosure. For example, the intermediary platform 1150 may be operatedby a third party representative that is authorized to act on behalf of(but otherwise unaffiliated with) a fund and/or authorized participant.The third party representative may facilitate creation and redemption ofshares in an exchange-traded fund by confidentially receiving (but notpublishing or otherwise exposing) a description of fund holdings thatcan be used by the intermediary platform 1150 to obtain and deliverunderlying securities as needed. This may, for example, includetransacting with the fund platform 102 using the fund basket asdescribed in a confidential file, or described in any other datadescribing the fund holdings. This may also include transacting with theauthorized participant platform 106 using a creation basket published byan investment company that operates the fund platform 102.

In one aspect, the intermediary platform 1150 may be operated by alicensed or otherwise authorized broker-dealer, e.g., a broker-dealerthat is, in the United States, a member of the Financial IndustryRegulatory Authority (FINRA), or any other similar licensing,monitoring, or regulatory authority. More generally, the broker-dealermay be any licensed broker, third-party broker-dealer, affiliatedbroker-dealer, or other party licensed (or otherwise authorized) andcompetent to transact in securities or otherwise suitable to function asan agent for transactions as described herein.

In another aspect, the intermediary platform 1150 may be removed, andthe AP platform 106 may transact directly with the fund platform 102(e.g., via a custodian and/or transfer agent 116 for the fund). Inanother aspect, the fund may provide the option of transacting directlywith APs (e.g., using a substitute basket or the like), while alsopermitting any other intermediaries to participate in such transactions,subject to suitable confidentiality agreements, as required by thenature of the baskets used by the intermediaries. This hybrid approachmay advantageously permit a fund to closely control the costs andexecution of transactions associated with create/redeem events, whilealso creating a market for potential intermediaries who can find ways tomore cheaply or efficiently broker such transactions. In this hybridapproach, the fund may also optionally reserve certain protected tradesthat are believed to contain sensitive information about the compositionor trading activity of the underlying fund. The fund may also or insteadintermittently establish blackout periods during which allcreation/redemption activity must be conducted directly with the fund.

To facilitate any of the above transactions, the fund platform 102 mayuse any suitable create or redeem baskets to shield holdings of the fundfrom disclosure, including any of the substitute baskets, custombaskets, fund baskets, or other alternative baskets described herein orotherwise useful for shielding fund holdings from disclosure duringtransactions, as well as combinations of the foregoing. While asubstitute basket may usefully be optimized using the techniquesdescribed herein, it will also be understood that a substitute basketmay usefully employ any technique suitable for facilitating hedging orarbitrage, as well as effective pricing mechanisms, during the creationand redemption of ETF shares while shielding actively managed holdingsfrom public disclosure during such transactions. For example, asubstitute basket may be purposefully constructed to contain one hundredpercent of the fund holdings, but using a different weighting than thefund for individual securities. The substitute basket may also orinstead employ a randomly generated overlap (within a target percentagerange of, e.g., 80-90%, 90-100%, or some other suitable range) betweenthe weighting of securities in the substitute basket and the weightingsin the fund portfolio. Other targets may also or instead be used, suchas a minimum overlap percentage with the fund portfolio. In anotheraspect, the substitute basket may use other ETFs that correspond to thefund portfolio's overall exposure in order to improve tracking of thefund's value while reducing the corresponding disclosure of actual fundholdings. In another aspect, separate baskets may be used for pricing(e.g., a reference basket that seeks to minimize variations from thefund share price) and transactions (e.g., a create or redeem basket thatseeks to minimize variations from the fund holdings). This approach mayfacilitate improved hedging or pricing by reducing risks between theknown reference portfolio and an unknown fund portfolio. More generally,any technique that sufficiently approaches true price movement tofacilitate transactions by authorized participants (or other marketparticipants), while shielding some or all of the holdings of a fund,may be used to create substitute baskets as described herein.

FIG. 12 shows a system for managing a fund with multiple share classes.In general, a fund may use a fund platform 102 to manage a portfolio ofinvestment assets, and to manage the purchase and sale of shares in theportfolio between the fund and traders 114. The traders 114 maygenerally be any of the investors described herein, including individualinvestors, institutional investors, and so forth. While the traders 114may buy and sell exchange-traded fund shares on the secondary markets110 (e.g., through a broker) as described above, the traders 114 mayalso or instead purchase mutual fund shares in the same fund of assetsdirectly from a fund, or from a brokerage or the like that transacts inthe mutual fund shares on behalf of the fund.

In general, the fund platform 102 may include any of the fund platformsdescribed herein. The fund platform 102 may generally include, or haveconnections or relationships with, market entities that can buy and sellpublicly traded securities and other investment assets on behalf of thefund. The assets comprising the net asset value of the fund may berecorded in one or more asset ledgers in a database 1240 maintained bythe fund. The database 1240 may also or instead store share dataincluding the number and type of outstanding shares in the pool ofassets owned by the fund. This may include exchange-traded fund shares,e.g., as described herein, which are typically sold in fixed creationunits through an authorized participant or the like, and then traded insecondary markets 110 such as public stock exchanges. The shares in thefund may also or instead include mutual fund shares or other shares ofthe pool of assets owned by the fund that can be bought and sold indirect transactions with the fund, or in transactions with a broker onbehalf of the fund. The database 1240 may also store other data, such assubstitute basket composition, net asset value, net asset valueindicators or estimates, tracking errors, or any of the other metrics,pricing information, or other data that might be used to manage the fundand/or provide pricing information to public markets as describedherein. It will be understood that, while illustrated as a singledatabase, the database 1240 may include a federated database, one ormore individual databases, or any other number and arrangement ofdatabases or other data repositories suitable for reliably storing funddata and timely responding to corresponding queries.

An ETF platform 1260 may include any of the exchange-traded fundplatform components described herein. The ETF platform 1260 generallyfacilitates the creation and redemption of ETF shares representingproportional interests in the basket of assets held by the fund. Morespecifically, under certain conditions, new ETF shares may be createdand issued through the ETF platform 1260 into the secondary market 110where the ETF shares can be bought and sold by traders 114. In general,these issued ETF shares may be bought and sold as long as thecorresponding secondary markets 110 are open. Under other, complementaryconditions, ETF shares may be redeemed and removed from the secondarymarket 110 using the ETF platform 1260.

The brokerage platform 1250 may facilitate a variety of differentdistribution channels for other fund share classes, such as any of avariety of mutual fund shares or the like. This may include directtransactions between the fund (or fund platform 102) and traders 114,e.g., where the traders 114 are individual or institutional customers ofthe fund. This may also or instead include transactions that arebrokered by another institution, e.g., where a trader 114 wishes toacquire shares in the fund but does not have a pre-existing commercialrelationship with the fund. While ETF shares are typically purchased ondemand during the operating hours of any corresponding secondarymarket(s) 110, mutual fund shares orders are executed at the end of atrading day, with a price based on the end-of-day net asset value forthe fund.

Fund shares distributed through the brokerage platform 1250 may includea number of different share classes that are organized, e.g., accordingto investment size, sales fees, and so forth. For example, the fundshares may include different shares for individual investors andinstitutional investors, each having different minimum investments.Other share types or share classes may focus on particular attributessuch as shares that have no sales load (whether front-loaded,back-loaded, or level-loaded), shares with low net expense ratios,shares for institutional investors (e.g., with high minimum investmentamounts), shares with waived loads, or shares for use in retirementfunds.

In a typical fund structure, a fund may include A shares that charge anupfront sales fee (typically along with lower marketing and distributionfees), B shares that charge a back-end or contingent deferred salescharge (typically along with higher expense ratios), and C shares with aback-end load that may be waived if the shares are held for a sufficientperiod. The different share classes may have other features. Forexample, B shares may automatically convert to A shares after a specificholding period, thus incurring the lower annual expenses associated withthe A shares. More generally, any combination of share classes and shareattributes may be used to transact in representative shares of a fund'sholdings, subject of course to approval and oversight by any applicableregulatory authorities. All such share classes in a fund may be boughtand sold through a brokerage platform 1250 instead of, or in additionto, exchange-traded fund shares for the fund, and all such share classesmay be used by a fund platform 102 to manage shares in a portfolio ascontemplated herein.

The above systems, devices, methods, processes, and the like may berealized in hardware, software, or any combination of these suitable fora particular application. The hardware may include a general-purposecomputer and/or dedicated computing device. This includes realization inone or more microprocessors, microcontrollers, embeddedmicrocontrollers, programmable digital signal processors or otherprogrammable devices or processing circuitry, along with internal and/orexternal memory. This may also, or instead, include one or moreapplication specific integrated circuits, programmable gate arrays,programmable array logic components, or any other device or devices thatmay be configured to process electronic signals. It will further beappreciated that a realization of the processes or devices describedabove may include computer-executable code created using a structuredprogramming language such as C, an object oriented programming languagesuch as C++, or any other high-level or low-level programming language(including assembly languages, hardware description languages, anddatabase programming languages and technologies) that may be stored,compiled or interpreted to run on one of the above devices, as well asheterogeneous combinations of processors, processor architectures, orcombinations of different hardware and software. In another aspect, themethods may be embodied in systems that perform the steps thereof, andmay be distributed across devices in a number of ways. At the same time,processing may be distributed across devices such as the various systemsdescribed above, or all of the functionality may be integrated into adedicated, standalone device or other hardware. In another aspect, meansfor performing the steps associated with the processes described abovemay include any of the hardware and/or software described above. Allsuch permutations and combinations are intended to fall within the scopeof the present disclosure.

Embodiments disclosed herein may include computer program productscomprising computer-executable code or computer-usable code that, whenexecuting on one or more computing devices, performs any and/or all ofthe steps thereof. The code may be stored in a non-transitory fashion ina computer memory, which may be a memory from which the program executes(such as random-access memory associated with a processor), or a storagedevice such as a disk drive, flash memory or any other optical,electromagnetic, magnetic, infrared or other device or combination ofdevices. In another aspect, any of the systems and methods describedabove may be embodied in any suitable transmission or propagation mediumcarrying computer-executable code and/or any inputs or outputs fromsame.

The method steps of the implementations described herein are intended toinclude any suitable method of causing such method steps to beperformed, consistent with the patentability of the following claims,unless a different meaning is expressly provided or otherwise clear fromthe context. So, for example, performing the step of X includes anysuitable method for causing another party such as a remote user, aremote processing resource (e.g., a server or cloud computer) or amachine to perform the step of X. Similarly, performing steps X, Y, andZ may include any method of directing or controlling any combination ofsuch other individuals or resources to perform steps X, Y, and Z toobtain the benefit of such steps. Thus, method steps of theimplementations described herein are intended to include any suitablemethod of causing one or more other parties or entities to perform thesteps, consistent with the patentability of the following claims, unlessa different meaning is expressly provided or otherwise clear from thecontext. Such parties or entities need not be under the direction orcontrol of any other party or entity, and need not be located within aparticular jurisdiction.

It will be appreciated that the devices, systems, and methods describedabove are set forth by way of example and not of limitation. Absent anexplicit indication to the contrary, the disclosed steps may bemodified, supplemented, omitted, and/or re-ordered without departingfrom the scope of this disclosure. Numerous variations, additions,omissions, and other modifications will be apparent to one of ordinaryskill in the art. In addition, the order or presentation of method stepsin the description and drawings above is not intended to require thisorder of performing the recited steps unless a particular order isexpressly required or otherwise clear from the context. Thus, whileparticular embodiments have been shown and described, it will beapparent to those skilled in the art that various changes andmodifications in form and details may be made therein without departingfrom the spirit and scope of this disclosure and are intended to form apart of the invention as defined by the following claims.

What is claimed is:
 1. A system comprising: an authorized participantplatform hosted by an authorized participant and operable to participatein a secondary market for shares in an exchange-traded fund; aninvestment company platform hosted by an investment company, theinvestment company actively and non-transparently managing a fundincluding a selection and weighting of financial assets according to aproprietary investment strategy, wherein the investment company platformis configured to periodically publish information about the fundincluding a substitute basket correlated to a value of the fund withoutdisclosing the selection and weighting of the financial assets held bythe fund; and a third party platform interposed between and coupled in acommunicating relationship with the authorized participant platform andthe investment company platform, the third party platform configured tofacilitate creation and redemption of shares in the exchange-traded fundby executing in-kind exchanges with the authorized participant platformof the substitute basket for shares equal to a creation unit of theexchange-traded fund and by executing in-kind exchanges with theinvestment company of a fund basket having the weighting of financialassets in the fund for the creation of the exchange-traded fund, whereinthe third party platform is configured to execute trades to convertbetween the substitute basket and the fund basket, and wherein the thirdparty platform prevents disclosure of the fund basket to the authorizedparticipant.
 2. The system of claim 1 wherein the third party platformis a broker platform.
 3. The system of claim 1 wherein the third partyplatform is operated by a third party independent from the authorizedparticipant and the investment company.
 4. The system of claim 3 whereinthe third party receives a confidential description of the fundincluding the selection and weighting of financial assets.
 5. The systemof claim 1 wherein the third party platform transacts with theinvestment company platform using the fund basket, and wherein the thirdparty platform transacts with the authorized participant platform usingthe substitute basket.
 6. A system comprising: an authorized participantplatform hosted by an authorized participant and operable to participatein a secondary market for shares in an exchange-traded fund; aninvestment company platform hosted by an investment company, theinvestment company actively and non-transparently managing a fund havinga composition including a selection and weighting of financial assetsdetermined according to a proprietary investment strategy, wherein theinvestment company platform is configured to periodically publishinformation about the fund including at least: (a) a substitute basketcontaining assets overlapping with the financial assets held by the fundand selected and weighted to have a substitute value correlated to thecomposition of the fund without revealing the composition of the fund,(b) at least once daily, a net asset value of the financial assets ofthe fund, (c) at least once per minute, an indicator of the net assetvalue synthesized from at least one of components of the fund and one ormore other correlated assets, and (d) one or more other indicators of avalue of the financial assets; and a broker platform interposed betweenand coupled in a communicating relationship with the authorizedparticipant platform and the investment company platform, the brokerplatform configured to: respond to a creation request from theauthorized participant platform by requesting and receiving in-kind afirst amount of the substitute basket from the authorized participantplatform equal in value to a creation unit of the shares in theexchange-traded fund, requesting the selection and weighting of thefinancial assets held by the fund from the investment company platform,executing one or more trades on the secondary market to convert thefirst amount of the substitute basket into a second amount of a fundbasket equal in value to the creation unit and having the selection andweighting of financial assets held by the fund without disclosing acomposition of the fund to the authorized participant platform,executing an in-kind exchange with the investment company platform ofthe fund basket for a first number of shares of the exchange-traded fundequal to the creation unit, and transmitting the first number of sharesto the authorized participant platform for trading on the secondarymarket in exchange for the first amount of the substitute basketreceived in-kind from the authorized participant, and respond to aredemption request from the authorized participant platform by receivinga second number of shares of the exchange-traded fund equal to thecreation unit from the authorized participant platform, receivingin-kind a third amount of the fund basket equal in value to the creationunit and having the selection and weighting of financial assets held bythe fund, executing one or more other trades on the secondary market toconvert the third amount of the fund basket into a fourth amount of thesubstitute basket equal in value to the creation unit without disclosingthe composition of the fund to the authorized participant platform, andexchanging in-kind the fourth amount of the substitute basket for thesecond number of shares of the exchange-traded fund received from theauthorized participant platform.
 7. The system of claim 6 wherein thesubstitute basket includes one or more financial assets not held by thefund.
 8. The system of claim 6 wherein the substitute basket has anactive share of 5% to 20% relative to a benchmark based on the selectionand weighting of the financial assets held by the fund.
 9. The system ofclaim 6 wherein the substitute basket has an active share of 5% to 30%relative to a benchmark based on the selection and weighting of thefinancial assets held by the fund.
 10. A system comprising: aninvestment company platform hosted by an investment company, theinvestment company actively and non-transparently managing a fund, thefund having a composition including a selection and weighting offinancial assets determined according to a proprietary investmentstrategy of the investment company and a number of exchange-tradedshares traded independently from the investment company on a secondarymarket, at least one of the financial assets held by the fund trading ona different market geographically and temporally offset from thesecondary market; a memory storing a record of the selection andweighting of financial assets held by the fund, and a record of asubstitute basket substantially overlapping with the selection andweighting of the financial assets held by the fund, the substitutebasket selected and weighted to correlate in value with the fund towithin a predetermined threshold, to have an active share of 5% to 30%relative to a benchmark based on the selection and weighting of thefinancial assets held by the fund, and to have a forecasted dailytracking error within a predetermined tracking error threshold relativeto the fund; one or more data feeds from remote sources of data for thesecondary market and the different market, the one or more data feedsincluding one or more feeds of public trading data for listedsecurities, at least one evaluative engine for estimating an intradayvalue of one of the financial assets trading on the different marketwhen the secondary market is open and the different market is closed;and one or more processors executing on the investment company platform,wherein the investment company platform is configured by computer codeexecuting on the one or more processors to calculate and publish anumber of portfolio metrics to facilitate transactions in theexchange-traded shares on the secondary market without access to theselection and weighting of financial assets held by the fund, theportfolio metrics including: (a) a net asset value for the fund, the netasset value calculated and published by the investment company platformtwo or more times during each trading day for the secondary market,including at least once at the close of trading for the secondary marketand at least once at the closing of trading for the different market,(b) an indicative net asset value, the indicative net asset valuecalculated and published at least once each minute during each tradingday, the indicative net asset value including at least one price fromthe evaluative engine for one of the financial assets traded on thedifferent market and at least one other price for an asset correlatedbut not identical to one of the financial assets held by the fund, (c) adeviation of the indicative net asset value from the net asset value atthe end of each trading day, (d) before the beginning of each tradingday, the substitute basket and the forecasted daily tracking error forthe substitute basket, (e) before the beginning of each trading day, oneor more correlated assets trading synchronously with the exchange-tradedshares and having an individual or aggregate value correlated to the netasset value of the fund, and (f) weightings of fund holdings by one ormore of industry, sector, country, and currency.
 11. The system of claim10 wherein the predetermined tracking error threshold does not exceedfive basis points of the value of the fund.
 12. A method for creating asubstitute basket representative of, but not identical to, a compositionof financial assets held by an actively managed, non-transparent fund,the method comprising: storing a composition of the fund, thecomposition including a selection and weight for a number of financialassets held by the fund; storing a transaction cost metric for each ofthe number of financial assets; storing a number of asset types, eachasset type having a number of categories exhaustively characterizing thefinancial assets held by the fund; receiving an inclusion score for eachof the number of financial assets from a portfolio manager for the fund,wherein a positive value for one of the inclusion scores weights acorresponding one of the number of financial assets to favor inclusionin the substitute basket, a negative value for one of the inclusionscores weights the corresponding one of the number of financial assetsto favor exclusion from the substitute basket, and a zero inclusionscore reduces an effect of a current weighting of the corresponding oneof the number of financial assets in the fund on inclusion in thesubstitute basket; determining an adjusted weight for each financialasset in the substitute basket according to an objective function thatmaximizes a weighted average inclusion score and a liquidity for thesubstitute basket, while constraining the adjusted weights such that:(1) allocations in the substitute basket remain within a predeterminedpercentage for each of the number of categories for each asset type heldby the fund, (2) the substitute basket has an active share of five totwenty percent relative to a benchmark based on the fund, (3) theadjusted weight is no less than one tenth of one percent for anynon-zero adjusted weight, and (4) the substitute basket has a forecasteddaily tracking error less that a predetermined threshold; and publishingthe substitute basket before a beginning of each trading day for amarket that trades shares in the fund, the substitute basket for use bymarket participants in valuing shares of the fund without receiving thecomposition of the fund.
 13. The method of claim 12 further comprisingpublishing an indicative net asset value for the fund at least onceevery fifteen seconds during the trading day, the indicative net assetvalue including an estimate of a value of the fund.
 14. The method ofclaim 12 further comprising publishing a net asset value for the fundtwo or more times during the trading day for the market.
 15. The methodof claim 12 wherein the fund includes at least one asset traded on asecondary market that is closed for at least a portion of the tradingday for the market.
 16. The method of claim 12 wherein the fund includesat least one foreign equity traded on a foreign stock exchange.
 17. Themethod of claim 12 further comprising monitoring the daily trackingerror for the substitute basket during the trading day.
 18. The methodof claim 17 further comprising publicly reporting the tracking error.19. The method of claim 17 further comprising providing a signal forfund intervention when the daily tracking error exceeds a limit greaterthan the predetermined threshold.
 20. The method of claim 12 wherein theforecasted daily tracking error is one standard deviation of ahistorical tracking error for the substitute basket.
 21. The method ofclaim 12 wherein the predetermined threshold for the daily trackingerror is not greater than five basis points of a net asset value of thefund.
 22. The method of claim 12 wherein at least one of the adjustedweights is zero.
 23. The method of claim 12 wherein the liquidity of thesubstitute basket is inversely related to a transaction cost for tradingin each of the financial assets in the substitute basket.
 24. The methodof claim 23 wherein the transaction cost metric includes a median dollartrading volume for each of the number of financial assets over apredetermined historical window.
 25. The method of claim 23 wherein thetransaction cost metric is based on one or more of a bid-ask spread, avolatility, an actual transaction cost, and a commission for trading ineach of the number of financial assets.
 26. The method of claim 12further comprising facilitating a primary market transaction for sharesin the fund wherein an authorized participant exchanges the substitutebasket for a creation unit.
 27. A computer program product for creatinga substitute basket representative of, but not identical to, acomposition of financial assets held by an actively managed,non-transparent fund, the computer program product comprising computerexecutable code embodied in a non-transitory computer readable mediumthat, when executing on one or more computing devices, performs thesteps of: storing a composition of the fund, the composition including aselection and weight for a number of financial assets held by the fund;storing a transaction cost metric for each of the number of financialassets; storing a number of asset types, each asset type having a numberof categories exhaustively characterizing the financial assets held bythe fund; receiving an inclusion score for each of the number offinancial assets from a portfolio manager for the fund, wherein apositive value for one of the inclusion scores weights a correspondingone of the number of financial assets to favor inclusion in thesubstitute basket, a negative value for one of the inclusion scoresweights the corresponding one of the number of financial assets to favorexclusion from the substitute basket, and a zero inclusion score reducesan effect of a current weighting of the corresponding one of the numberof financial assets in the fund on inclusion in the substitute basket;determining an adjusted weight for each financial asset in thesubstitute basket according to an objective function that maximizes aweighted average inclusion score and a liquidity for the substitutebasket, while constraining the adjusted weights such that: (1)allocations in the substitute basket remain within a predeterminedpercentage for each of the number of categories for each asset type heldby the fund, (2) the substitute basket has an active share of five totwenty percent relative to a benchmark based on the fund, (3) theadjusted weight is no less than one tenth of one percent for anynon-zero adjusted weight, and (4) the substitute basket has a forecasteddaily tracking error less than a predetermined threshold; and publishingthe substitute basket before a beginning of each trading day for amarket that trades shares in the fund, the substitute basket for use bymarket participants in valuing shares of the fund without receiving thecomposition of the fund.
 28. A system comprising: an investment companyplatform hosted by an investment company, the investment companyactively and non-transparently managing a fund, the fund having acomposition including a selection and weighting of financial assetsdetermined according to a proprietary investment strategy of theinvestment company and the fund traded in two or more share typesincluding a number of mutual fund shares traded by the investmentcompany with market participants and a number of exchange-traded sharestraded independently from the investment company on a secondary market;a memory storing a record of the selection and weighting of financialassets held by the fund, and a record of a substitute basketsubstantially overlapping with the selection and weighting of thefinancial assets held by the fund, the substitute basket selected andweighted to correlate in value with the fund to within a predeterminedthreshold, to have an active share of 5% to 30% relative to a benchmarkbased on the selection and weighting of the financial assets held by thefund, and to have a forecasted daily tracking error within apredetermined tracking error threshold relative to the fund; one or moredata feeds from remote sources of data for the secondary market and adifferent market, the one or more data feeds including one or more feedsof public trading data for listed securities, at least one evaluativeengine for estimating an intraday value of one of the financial assetstrading on the different market when the secondary market is open andthe different market is closed; and one or more processors executing onthe investment company platform, wherein the investment company platformis configured by computer code executing on the one or more processorsto calculate and publish a number of portfolio metrics to facilitatetransactions in the exchange-traded shares on the secondary marketwithout access to the selection and weighting of financial assets heldby the fund, the portfolio metrics including at least one of: (a) a netasset value for the fund, the net asset value calculated and publishedby the investment company platform two or more times during each tradingday for the secondary market, including at least once at the close oftrading for the secondary market and at least once at the closing oftrading for the different market, (b) an indicative net asset value, theindicative net asset value calculated and published at least once eachminute during each trading day, the indicative net asset value includingat least one price from the evaluative engine for one of the financialassets traded on the different market and at least one other price foran asset correlated but not identical to one of the financial assetsheld by the fund, (c) a deviation of the indicative net asset value fromthe net asset value at the end of each trading day, (d) before thebeginning of each trading day, the substitute basket and the forecasteddaily tracking error for the substitute basket, (e) before the beginningof each trading day, one or more correlated assets trading synchronouslywith the exchange-traded shares and having an individual or aggregatevalue correlated to the net asset value of the fund, and (f) weightingsof fund holdings by one or more of industry, sector, country, andcurrency.